Quote of the Day

Reductio ad absurdum done right.

The Upside of Income Inequality

By Gary S. Becker and Kevin M. Murphy
From the May/June 2007 Issue of American.com

For many, the solution to an increase in inequality is to make the tax structure more progressive—raise taxes on high-income households and reduce taxes on low-income households. While this may sound sensible, it is not. Would these same indi­viduals advocate a tax on going to college and a subsidy for dropping out of high school in response to the increased importance of education? We think not. Yet shifting the tax structure has exactly this effect.

14 thoughts on “Quote of the Day”

  1. This example is one of the answers to the question posed in the post about the March of Folly a few days ago. Statist solutions SEEM to work for a while, then the true consequences, stripped of rhetoric and good intentions, become glaringly obvious.

    Another obvious case is the War on Poverty, whose main cultural effect seems to be the almost total destruction of the black family structure. As I have said in another context, if the KKK was given the right to design programs to inflict as much punishment on the black community as possible, it would have produced the Wars on Poverty and Drugs.

    It is worth noting that the two main subcultural groups in the US which show the most consistent lack of progress in education and employment, among other things, are the two ethnic groups that have been “adopted” by the government and given the status as wards of the state—blacks and native Americans.

    For generations, the state has passed program after program whose stated purpose is support of and assistence to these subgroups in our society. These “acts of compassion” have had just about the same effect on these ethnic groups as the endless stream of “farm assistence” bills has had on the survival of the small, family farm.

    The worst disaster that can befall anyone in our (or any) society is becoming the object of political guardianship. No matter how good it sounds, and how noble the intentions are behind it, the end result is invariably the destruction of everything that was supposedly being saved.

  2. With sales taxes, flat Social Security tax, property taxes paid directly, or indirectly through rents, and with the highest income tax bracket being 35% (the lowest top bracket in the developed world and rarely paid in full by the wealthiest)–the total tax burden in the US is regressive. And a diminishing part of what is collected has been going to transfer payments. So let’s start our little “reductio ad absurdam” thought experiment from there.

    Veryretired implies that the African American family has been damaged by welfare, and the Native American family by…I’m not sure what generous government largesse he’s thinking of. Forcing them onto reservations?

    In any case, let’s look at the African American family and let’s focus concretely on single-parent households. I think veryretired may have in mind the stereotype of the couple who cannot live together, or the woman who has an additional child out of wedlock, in response to welfare rules. Whether this was ever true, it’s an unlikely explanation of family structure now given that welfare/TANF is capped for a limited number of years. Other explanations to be considered include: the sharp decline in manufacturing jobs in inner city areas sending many men into chronic unemployment; the number of men in jail and prison; deteriorating housing and schools (and now breakup of families and neighborhoods in some places through gentrification); and the simple lack of capital and social incentives to get married. Obviously these are interrelated phenomena. Veryretired would find that other communities that have experienced sharp economic decline, such as (white) rural areas, also have lots of single parent households. Is the common denominator that they are the recipients of government aid? If so, do directors of large agribusiness concerns and defense contractors have pathological family lives? (Actually they probably do.)

    It’s good that veryretired is thinking about the problems of these communities, and I certainly wouldn’t say that transfer payments are, by themselves, the way to fix them. Taking away the payments (which is already happening) is not, by itself, the way to solve them.

  3. Outraged,
    What statistics or anecdotal evidence do you have that defense contractors and directors of agribusiness concerns have pathological family lives?

  4. Leveling incomss is the secret to Castro’s success in creating a “People’s Paradise” in Cuba. The reason so many risk their lives to leave Cuba is a profound sense of being unworthy.

  5. Outraged,

    Is the common denominator that they are the recipients of government aid? If so, do directors of large agribusiness concerns and defense contractors have pathological family lives?

    No, the cause is not government money per se but rather the incentive that ANY monetary payments creates. Had some demented trillion-are paid people privately the results would have been the same.

    In 1988, the state of Texas would pay a poor, 15 year old girl the equivalent of 16,500 to have a child out of wedlock. That is completely in addition to the support the state would pay if she did not have a child. Other states had much higher,People respond to economic incentives. We get exactly what we paid for.

    Throughout the history of every culture (read Confucius) people have worried about the perverse incentives created by any charity. There must be a balance between helping people in need and not creating a positive incentive for self-destructive behavior. The people who designed the Welfare state in the 60’s created a cartoon model of the poor that essentially cast them in the role of industrial age “nobel savages” who did not have the same feelings and motivations as other citizens. They believed they could give anything to poor people in any amount and that poor people would only react in a positive way regardless of the incentives. The effects were absolutely devastating. (And yes, the same problems show up in poor, white rural communities as well).

    We pay agribusiness not to grow food, so they make money for doing nothing. We pay defense contractors to make things that go boom under any circumstance and we end up with very expensive weapons systems. For nearly 40 years, we paid the poorest members of our society to wreck their families and we got wrecked families. Had we paid agribusiness or defense contractors to wreck their families that is exactly what they would have done.

    Taxes create incentives but with negative instead of positive incentives. When we tax an activity, we get less of it. If we tax people who work hard, we get less hard work. If we tax people who spend a lot on education, we get less education. If we tax investment in capital improvements, we get fewer improvements.

  6. Being made a ward of the state doesn’t necessarily mean that the government is just going to give you benefits—indeed, just the opposite is often the case.

    It means that major elements of, and decisions about, your life are taken over by someone else, who then decides what is best for you based on criteria of their choosing, not yours.

    The result is Native Americans who are not afforded the status of individual citizens, with all the rights and liberties enjoyed by that status, but are classed as a collective, “the Tribe of (fill in the blank) Indians”, who are assigned to live here or there, whose schools are built and staffed by an outside agency, who are governed by corrupt cliques instead of politically answerable administrations, whose earnings from various royalties are pooled, managed by fiat, and, apparently, stolen, as a massive investigation of the disposition of billions of dollars in missing mineral royalties and other assets has shown.

    The only way some of the tribes have managed to undo the centuries of “specialness” that plagued them was to exploit the exemptions that their tribal status conferred to build gambling casinos. If anyone thinks that this recent positive makes up for the centuries of negatives that being tribes instead of individuals had inflicted, then they must reason in the same manner as certain outraged commenters here, if that is what it can be called.

    As for the black community, studies of their family structure and general status before the government declared war on their men showed that they were generally within the same range as the larger white culture, although there was no way to adjust for the serious damage that relentless racial descrimination had and was causing. But marriage and illegitimacy rates were not too far off the social norms, and educational and career aspirations were very similar.

    Civil rights efforts helped the latter aspirations become more attainable, but much of this progress was undone by the disastrous policies of well-intentioned welfare rules which penalized black couples for being married, or for even having a male wage earner, or potential wage earner, in the household.

    After these rules were in effect for a very short time, the marriage rates and illegitimacy rates plummetted and skyrocketed, in that order.

    Were there other factors involved? Yes, of course. But the many studies of the status of the black family, and the hard facts of life for fatherless black children, has clearly shown that Sen Moynahan’s dire predictions back in the 1960’s were, in fact, modest compared to the actual situation.

    Add in the lunatic prohibitions against various controlled substances that people obviously want, but the busybody state declres illegal, and the drug based criminal gangs that now dominate black neighborhoods in far too many areas have a ready made recruiting ground filled with fatherless youths desparate for status, and a connection with something larger than their own stunted lives.

    The result is an underclass whose lack of economic, family, and educational structures entraps it in quicksand, and whose incarceration rates prevent any possibility of returning to “normal” social standing, or even the exercise of routine civil rights such as voting or applying for various forms of employment.

    The various “wars” that have decimated many communities of color around the country are now in the fourth decade. Defend them if you wish, but do not pretend that their casualties and depredations have gone unremarked, or that the good intentions of the proponents of these state adoptions mitigates their calamitous effects.

    Thomas Sowell has for many years commented on and documented the workings of the various attempts by the state to “rescue” different groups in our society by means of massive programs of assistance of one kind or another. His work is easily found, easily read, and the documentation clear and unambiguous. There are others, of course, but Sowell’s are the most available, in many senses of that word.

    Before adopting a condescending attitude towards those with whom you disagree, perhaps you should educate yourself a little bit about how things actually work in the real world, as oppposed to the airy-fairy world of academic theorizing, or political rhetoric.

  7. Couldn’t agree more. A progressive tax structure doesn’t make economic sense.

    If the tax rate on the wealthy increases, I don’t know, say after the 2008 elections, it will only serve to slow down growth.

  8. No tax on production makes economic sense, including taxes on income (labor taxes). As Shannon points out, we get less of it. In the case of income taxes, this means less employment and less income.

    Consumption taxes are broad based, gives taxpayers more control over the taxes they pay, and are completely mitigable for the poor.


  9. Outrage,

    the total tax burden in the US is regressive…

    Depends on you definition of regressive. However, buy any definition, the US tax structure is far less regressive now than it was during the 70’s when the Left reigned.

    One must remember that the nominal tax rate means very little in calculating the real-world tax contribution. The upper income brackets pay a higher percentage of income and capital taxes today than they did during the 70’s even though the nominal rates are lower. In the 50’s-early 80’s, high tax rates were offset nearly completely by a Byzantine law code that created vast loopholes. You may recall that Malcom Forbs, then the world’s richest man, paid no taxes at all for 3 years during the 70’s by exploiting loopholes. By some calculations, the top brackets effective rate during that time was around 25%. Reagan’s tax reforms lowered the tax rate but close the loop holes thus raising the effective rate back into the low 30%+ range.

    I suppose one could argue that the Leftist let the real tax rate on the wealthy fall for over 30 years and that squeezed the working poor at the same time that their paychecks became loaded with various taxes on jobs and insurance requirements but that problem largely ended nearly 25 years ago.

  10. If we’re going to cite examples, why look at Cuba in isolation. Poverty is indeed a significant problem there, but less so than Haiti, whose people are equally keen to leave. Were Cubans jumping on rafts to Haiti or El Salvador, perhaps the point would be worth making. But they aren’t.

    Meanwhile, living standards are very high in statist Singapore, Japan and Scandinavia, all of which attract immigrants.

    Clearly, there is no direct correlation between statist economics and poverty. The reality is far more complicated. There is indeed a compelling moral argument against statist economics, but that is separate from an objective assessment of economic performance.

    Statist economics is working very well in China and most of the rest of Asia, along with Scandinavia and parts of Europe. That doesn’t mean it is the best model for the U.S. or the best model for anyone, really. It does mean, however, that sweeping generalization about statism causing poverty are highly disprovable.

    While on the one hand, we can point to the success of statist economics in many places, we also know that the very poorest people in the world are found in countries with no welfare benefits whatsoever. Arguably, many of the poorest do suffer from statist economics in a more general sense, in that there is generally little legal respect for private property in their countries. Still, we can at least see that a statist framework is need to at a minimum secure institutions that are required to guarantee property rights.

    Securing those institutions is one of the points that makes solving poverty a lot more difficult than simply adopting the correct ideology.

  11. Cuba is one of the least free countries. Singapore, Japan and especially Scandinavia are among the most free. That’s why people seek go to those places and why they seek to leave Cuba. To lump all of these countries together as “statist” is to confuse the issue based on an inadequate term. (And BTW, Cubans are fleeing to any countries that will have them. If they’re not going to Haiti it’s because it’s better to go to Mexico or the USA.)

    “Statist” economics is not working well in China or anywhere else. Statist economics has always been a failure everywhere. The countries such as China that are growing economically are doing so to the extent they have abandoned statist economics and liberalized their economies. Countries that haven’t done that, such as Cuba, are still stagnating.

  12. Statist economies don’t work well because the people who design them aren’t as smart as they claim to be. The fact that a population unfettered by the rules these smart people devise can out perform them is simply unaccptable.

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